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Do Physician Non-Compete Agreements Violate Public Policy?

March 14, 2007

The Illinois Supreme Court recently answered that question “no,” and ruled that any change in that policy would have to come from the legislature. The same rule applies in Wisconsin, although this state is more likely to find activity, temporal, and geographic restrictions in non-competition agreements unreasonable and, therefore, unenforceable.

Physician Non-competition Agreements in IllinoisThe Illinois case involved two cardiologists who had been employed by St. John Heart Clinic in Chicago. Mohanty v. St. John Heart Clinic, S.C., No. 101251, N.E.2d, 2006 WL 341970 (Illinois,December 21, 2006). Their employment agreements prohibited them from engaging in the practice of medicine upon termination of their employment at any of the four hospitals where the clinic’s sole owner had privileges. One physician was restricted for a period of three years at the four hospitals and within a two-mile radius of the clinic’s two offices; the other physician was restricted for a period of five years at the four hospitals and within a five-mile radius of those offices. The court found both agreements reasonable.

The Illinois court rejected the argument that physician non-competition agreements should be held void as against public policy because they restrict patient choice. Although attorneys may not enter into non-competition agreements in Illinois and most states, including Wisconsin, for that reason, the court noted that the AMA’s Council on Ethical and Judicial Affairs merely discourages such agreements and has not found them unethical as they are under the Rules of Professional Conduct for attorneys. (See, AMA Opinion 9.02.) The court further noted that those states that do prohibit non-competition covenants in medical employment contracts (Colorado, Delaware and Massachusetts) did so by legislation and not court rule.

The court went on to find the agreements’ activity, temporal, and geographic restrictions reasonable under Illinois law, in stark contrast to the rule in Wisconsin. Looking at the more restrictive of the agreements, the court ruled that plaintiffs faced no undue hardship because “they are free to practice medicine outside the five-mile limit, which, given the heavily populated Chicago metropolitan area, would not deprive them of employment.” Yet, the same agreements would be held unreasonable and, therefore, void under existing Wisconsin law.

Physician Non-competition Agreements in WisconsinNon-competition agreements are only enforceable in Wisconsin if they meet the following five requirements:

Are necessary for the protection of the employer;

Provide a reasonable time restriction;

Provide a reasonable territorial limit;

Are not harsh or oppressive to the employee; and

Are not contrary to public policy.

The Wisconsin Supreme Court ruled in 1971, with little discussion, that physician non-competition agreements are not contrary to public policy. Oudenhoven v. Nishioka, M.D., 52 Wis. 2d 503.190 N.W. 2d 920 (1971). A case currently pending in our court of appeals shows that the remaining requirements are strictly applied in Wisconsin.

In Fox Valley Thoracic Surgical Associates, S.C. v. Ferrante, M.D., Outagamie County Circuit Court, Case No. 04-cv-716, Appeal No. 2006 AP 3201., the circuit court refused to enforce a non-competition agreement that prohibited a physician from practicing heart surgery or thoracic medicine within a 30-mile radius of Neenah, Menasha or Appleton for one year. Temporal restrictions of up to two years are generally held valid in Wisconsin, but the court found this agreement unreasonable both as to activity and territory.

The court found the agreement overbroad as to activity because the employer’s practice was limited to heart and thoracic surgery. The agreement went further, prohibiting Ferrante “from practicing any type of medicine related to the thorax” within the restricted area. This was held unnecessary to protect the interests of the employer. The court also found the employer had not justified the territorial restriction by presenting sufficient evidence “as to its geographic distribution of client base.”

The employer has appealed both of these rulings, but if either one is upheld, the non-competition agreement is void in its entirety. To discourage employers from overreaching in these agreements, Wisconsin by statute makes the entire non-competition provision unenforceable if any part of it is found unreasonable. Wisconsin courts continue to strictly scrutinize non-competition agreements to protect employees and promote competition. Employers must therefore exercise great care in drafting non-competition agreements, and periodically review them in light of subsequent court cases, to ensure that they will be enforced as intended.

If you would like more information on physician noncompete agreements in Wisconsin, please contact Robert Dreps (608-284-2606 or rdreps@gklaw.com) or another member of our Godfrey & Kahn Healthcare Team.